Heritage Financial Group, Inc. (NASDAQ: HBOS), the holding company for HeritageBank of the South, today announced unaudited financial results for the quarter ended March 31, 2014. Key aspects of the Company's results for the first quarter of 2014 include:

Net income of $1.3 million or $0.18 per diluted share, down 61% from $3.4 million or $0.45 per diluted share for the linked quarter and down 66% from $3.9 million or $0.52 per diluted share for the year-earlier quarter;

Excluding special items for each quarter, net income of $1.8 million or $0.24 per diluted share, down 55% from $4.0 million or $0.53 per diluted share for the linked quarter and down 11% from $2.0 million or $0.27 per diluted share for the year-earlier quarter (see reconciliation of non-GAAP items);

Loan growth, excluding loans acquired through FDIC-assisted acquisitions, of $18.0 million or 3% on a linked-quarter basis and $98.8 million or 16% compared with the year-earlier quarter;

A decline in nonperforming loans, excluding FDIC-acquired loans, of 2% on a linked-quarter basis and 28% compared with the year-earlier quarter;

A decrease in the provision for loan losses, excluding FDIC-acquired loans, to $65,000, down 70% from $220,000 for the linked quarter and down 86% compared with $450,000 for the year-earlier quarter; and

An increase in the provision for FDIC-acquired loan losses to $105,000, up from $12,000 for the linked quarter (there was no provision for FDIC-acquired loan losses in the year-earlier quarter).

Commenting on the results, Leonard Dorminey, President and Chief Executive Officer, said, "While accretion from our FDIC-assisted acquisitions and mortgage banking add volatility to our earnings, we are pleased to note ongoing improvement in our core operations. Asset quality indicators in our core loan portfolio continue to improve and organic loan growth is on track for another year of double-digit growth. Our banking expansion efforts continue as we opened a loan production office in Birmingham during the quarter. Our mortgage expansion also continues as we were able to recruit a mortgage banking team in Colorado Springs, Colorado during the quarter. This team, which had previously worked with our mortgage executives, will add significantly to our mortgage expansion efforts."

Dorminey noted that the Company's Board of Directors has declared a regular quarterly cash dividend of $0.07 per share, which will be paid on May 23, 2014, to stockholders of record as of May 9, 2014. Dorminey also noted the Company’s Board of Directors also has extended the current stock repurchase plan for one year. The plan has approximately 340,000 shares authorized for repurchase and now expires in May 2015, unless otherwise completed or extended.

Acquisition News

Commenting on the Company's recently announced acquisition, Dorminey added, "We are excited and optimistic about our pending acquisition of Alarion Financial Services, Inc., which is expected to contribute significantly to our growth plans in Florida and for our mortgage division. This transaction is a significant event, not only for its implications for our franchise, but also because it demonstrates that our company is well positioned to be a consolidator in the post FDIC-assisted transaction merger and acquisition environment."

First Quarter 2014 Results of Operations

The $2.1 million decrease in reported quarterly earnings for the first quarter of 2014 compared with the linked quarter resulted primarily from the following items:

Decreased loan discount accretion from FDIC-acquired loans of $2.4 million coupled with steady negative accretion of the FDIC loss-share receivable; and

Decreased mortgage banking fees of $783,000.

The $2.6 million decrease in reported quarterly earnings for the first quarter of 2014 compared with the year-earlier quarter primarily resulted from the following items:

Reduction in gain on acquisitions of $4.2 million;

Increased salaries and employee benefits of $2.2 million; offset by

Improved interest income on loans held for sale of $910,000; and

Increased interest income on securities of $409,000.

Net interest income for the first quarter of 2014 increased 9% to $14.0 million from $12.9 million in the year-earlier quarter, primarily reflecting an increase in interest-earning assets related to both acquisitions and organic growth and a reduction in the cost of interest-bearing liabilities. The Company's net interest margin was 4.66% for the first quarter of 2014, a decline of 69 basis points from 5.35% for the year-earlier period. The reduction in net interest margin for the first quarter of 2014 compared with the year-earlier quarter was driven by a decline in the yield on loans, offset in part by an increase in the yield on investment securities coupled with a reduction in the cost of interest-bearing liabilities as rates continue to reset to lower levels and the Company takes advantage of historically low interest rates on non-deposit funding. Excluding FDIC-acquired loan discount adjustments from the net interest margin, the core net interest margin remained unchanged at 3.23% for the first quarter of 2014 compared to the year-earlier quarter.

In the first quarter of 2014, the Company continued to achieve loan growth, with its core loan portfolio increasing $18.0 million organically on a linked-quarter basis and advancing $98.8 million overall compared with the year-earlier quarter. For the first quarter of 2014, the Company's loan portfolio, including FDIC-acquired loans, totaled $800.9 million, increasing $11.1 million on a linked-quarter basis from $789.8 million and from $743.8 million compared with the year-earlier quarter. The organic loan growth for the linked quarter was primarily driven by growth in the Albany, Macon, South Atlanta, and Valdosta, Georgia markets, as well as in the Auburn and Birmingham, Alabama markets. Total deposits stood at $1.127 billion at the end of the first quarter of 2014, up 5% from $1.076 billion on a linked-quarter basis, and up 3% from $1.096 billion for the year-earlier quarter.

For the first quarter of 2014, the Company's loans held for sale totaled $126.4 million, increasing $15.8 million, or 14%, on a linked-quarter basis from $110.7 million, and increasing $107.5 million, or 569%, from $18.9 million compared with the year-earlier quarter. The increase in the loans held for sale for the current quarter was driven by an increase in production outpacing loan sales for the quarter. Loan sales to Fannie Mae for the first quarter totaled $88.3 million and, separately, the Company recorded a gain of $717,000 related to the mortgage servicing rights for those loans. During the quarter, the Company made the decision to slow loan sales to Fannie Mae in order to sell to Freddie Mac for better execution. The Company received approval to sell loans to Freddie Mac at the end of the first quarter of 2014, and expects to deliver loans during the second quarter of 2014. Total mortgage production for the first quarter was $135.5 million, up 13% on a linked-quarter basis from $120.4 million and up 146% from $55.0 million compared with the year-earlier quarter.

Noninterest income for the first quarter of 2014 declined 48% to $3.5 million from $6.8 million in the year-earlier quarter, primarily driven by a decrease in gain on acquisitions of $4.2 million offset in part by a decline in negative accretion for the FDIC loss-share receivable of $366,000 and increases in service charges on deposit accounts of $289,000 and bankcard services income of $127,000. Noninterest expense for the first quarter of 2014 increased 16% to $15.5 million from $13.4 million in the year-earlier quarter, primarily driven by increases in salaries and employee benefits of $2.2 million related to the expansion of the mortgage division.

Accounting for FDIC-Assisted Acquisitions

The Company performs ongoing assessments of the estimated cash flows of its FDIC-acquired loan portfolios. The fair value of the FDIC-acquired loan portfolios consisted of $47.7 million in covered and $59.8 million in non-covered loans at the end of the first quarter of 2014 compared with $65.8 million in covered and $83.3 million in non-covered loans for the year-earlier quarter. The outstanding principal balance of the FDIC-acquired loan portfolios totaled $165.8 million at the end of the first quarter of 2014 compared with $234.8 million for the year-earlier quarter. The details of the accounting for the FDIC-acquired loan portfolios for the first quarter of 2014 are as follows:

For the first quarter of 2014, loan discount accretion recognized in interest income declined 39% to $3.9 million from $6.3 million for the linked quarter, and declined 16% from $4.6 million for the year-earlier quarter. Provision expense for non-covered loans of $105,000 was recorded for a valuation adjustment needed for the Frontier portfolio to adjust the yield for the current quarter compared with $12,000 for the linked quarter and no provision expense for the year-earlier quarter. The FDIC loss-share receivable associated with covered FDIC-acquired assets decreased 9% to $37.6 million from $41.3 million for the linked quarter and declined 28% from $52.0 million for the year-earlier quarter. The reduction in the FDIC loss-share receivable for the linked quarter was primarily driven by negative accretion of $2.0 million affecting the loss-share receivable asset associated with the improvement in expected cash flows of the covered FDIC-acquired performing loan portfolios and FDIC reimbursements received of $1.5 million. An increase to the FDIC clawback liability accrual was recorded as an expense for the current quarter of $543,000, which increased the total accrual to $2.5 million. This clawback was caused by an improvement in estimates of expected cash flows for both FDIC-assisted acquisitions covered under loss-sharing agreements.

The covered FDIC-acquired loan discount affecting the loss-share receivable was $35.9 million, or 95.4% of the loss-share receivable, for the first quarter of 2014 compared with $50.9 million, or 97.8% of the loss-share receivable, for the year-earlier quarter. The gross balance of covered FDIC-acquired assets decreased to $100.5 million for the first quarter of 2014 compared with $142.9 million for the year-earlier quarter. The FDIC loss-share receivable as a percent of the covered FDIC-acquired assets decreased to 37.5% compared with 36.4% for the year-earlier quarter.

Asset Quality

Total nonperforming assets, excluding FDIC-acquired assets, decreased to $10.3 million, or 0.73% of total assets, compared with $11.2 million, or 0.81% of total assets, for the linked quarter and declined from $15.8 million, or 1.15% of total assets, for the year-earlier quarter. Annualized net recoveries to average outstanding loans, excluding FDIC-acquired loans, were 0.01% for the first quarter of 2014 compared with annualized net charge-offs of 0.10% for the linked quarter and annualized net-charge-offs of 0.27% for the year-earlier quarter. Nonperforming loans, excluding FDIC-acquired loans, totaled $9.2 million for the first quarter of 2014, down from $9.4 million for the linked quarter and from $12.7 million for the year-earlier quarter. Other real estate owned and repossessed assets, excluding FDIC-acquired assets, totaled $1.1 million for the first quarter of 2014, down from $1.8 million for the linked quarter and from $3.0 million for the year-earlier quarter.

The provision for loan losses on non-FDIC-acquired loans decreased to $65,000 for the first quarter of 2014 from $220,000 for the linked quarter and from $450,000 for the year-earlier quarter, primarily driven by improving trends in total criticized and classified loans. For the first quarter in 2014, the allowance for loan losses represented 1.30% of total loans outstanding, excluding FDIC-acquired loans, versus 1.31% for the linked quarter and 1.51% for the year-earlier quarter. The improving loan loss allowance was primarily the result of declining criticized and classified loans as a percentage of total loans.

Capital Management Initiatives

The Company's Board of Directors has declared a regular quarterly cash dividend of $0.07 per share, payable on May 23, 2014, to stockholders of record as of May 9, 2014. The Board of Directors also has extended the Company's current stock repurchase program for an additional year until April 2015, unless extended or otherwise completed earlier, and has total authorization under the program to purchase 340,000 shares, or 4% of the Company's currently outstanding common stock.

Looking ahead, the Company intends to maintain its capital strength at the current level to support growth and its acquisition activities. Accordingly, future stock buybacks and future dividends will be premised largely on the Company's future earnings power rather than a return of capital to stockholders.

The Company's estimated total risk-based capital ratio at March 31, 2014, was 13.8%, significantly exceeding the required minimum of 10% to be considered a well-capitalized institution. The ratio of tangible common equity to total tangible assets was 8.7% as of March 31, 2014.

About Heritage Financial Group, Inc. and HeritageBank of the South

Heritage Financial Group, Inc. is the holding company for HeritageBank of the South, a community-oriented bank serving primarily Georgia, Florida and Alabama through 29 banking locations, 15 mortgage offices, and 5 investment offices. As of March 31, 2014, the Company reported total assets of approximately $1.4 billion and total stockholders' equity of approximately $128 million. For more information about the Company, visit HeritageBank of the South on the Web at www.eheritagebank.com under the "Investors" tab.

Cautionary Note Regarding Forward Looking Statements

Except for historical information contained herein, the matters included in this news release and other information in the Company's filings with the Securities and Exchange Commission may contain certain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements can be identified by the fact that they do not relate strictly to historical or current facts and often use words or phrases "opportunities," "prospects," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," "intends" or similar expressions. The forward-looking statements made herein represent the current expectations, plans or forecasts of the Company's future results and revenues. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995 and includes this statement for purposes of these safe harbor provisions. These statements are not guarantees of future results or performance and involve certain risks, uncertainties and assumptions that are difficult to predict and are often beyond the Company's control. Actual outcomes and results may differ materially from those expressed in, or implied by, any of these forward-looking statements. Investors should not place undue reliance on any forward-looking statement and should consider the uncertainties and risks, discussed under Item 1A. "Risk Factors" of the Company's 2013 Annual Report on Form 10-K and in any of the Company's subsequent SEC filings. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in its other filings with the SEC.

Salaries and employee benefits – early retirement and severance expense

–

–

(7

)

Acquisition-related expenses

(52

)

(792

)

(102

)

Impairment loss on assets held for sale

–

–

(328

)

Realized loss on the disposition of assets held for sale

–

–

(226

)

Accrual of FDIC acquisitions estimated clawback liability

(543

)

(566

)

(261

)

Adjusted noninterest expense

$

14,881

$

11,998

$

14,782

Net income as reported

$

1,343

$

3,928

$

3,405

Total adjustments, net of tax*

441

(1,924

)

589

Adjusted net income

$

1,784

$

2,004

$

3,994

Diluted earnings per share

$

0.18

$

0.52

$

0.45

Total adjustments, net of tax*

0.06

(0.25

)

0.08

Adjusted diluted earnings per share

$

0.24

$

0.27

$

0.53

* The effective tax rate for the period presented is used to determine net of tax amounts.

Net Income and Diluted Earnings Per Share are presented in accordance with Generally Accepted Accounting Principles ("GAAP"). Adjusted Noninterest Income, Adjusted Noninterest Expense, Adjusted Net Income and Adjusted Diluted Earnings Per Share are non-GAAP financial measures. The Company believes that these non-GAAP measures aid in understanding and comparing current-year and prior-year results, both of which include unusual items of different natures. These non-GAAP measures should be viewed in addition to, and not as a substitute for, the Company's reported results.

Heritage Financial Group, Inc. and Subsidiary

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands)

(Unaudited)

March 31,

December 31,

2014

2013*

Cash and due from banks

$

27,703

$

34,804

Interest-bearing deposits in banks

10,495

3,249

Federal funds sold

1,215

130

Cash and cash equivalents

39,413

38,183

Securities available for sale, at fair value

305,044

294,299

Federal Home Loan Bank stock, at cost

6,282

7,342

Other equity securities, at cost

1,010

1,010

Loans held for sale

126,436

110,669

Loans

762,344

747,862

Covered loans

47,684

50,891

Less allowance for loan losses

9,145

8,955

Loans, net

800,883

789,798

Other real estate owned

2,632

3,482

Covered other real estate owned

6,095

7,053

Total other real estate owned

8,727

10,535

FDIC loss-share receivable

37,637

41,306

Premises and equipment, net

38,603

37,978

Goodwill and intangible assets

4,757

4,253

Cash surrender value of bank owned life insurance

24,372

24,183

Other assets

20,376

21,369

Total assets

$

1,413,540

$

1,380,925

LIABILITIES AND SHAREHOLDERS' EQUITY

Non-interest-bearing deposits

$

163,090

$

148,253

Interest-bearing deposits

963,564

928,168

Total deposits

1,126,654

1,076,421

Federal funds purchased and securities sold under repurchase agreements

Average loan balances includes nonaccrual loans for the periods presented.

(2)

Fully Taxable Equivalent (“FTE”) at the rate of 34%. The FTE basis adjusts for the tax benefits of income on certain tax-exempt loans and investments using the federal statutory rate of 34% for each period presented. The Company believes this measure to be the preferred industry measurement of net interest income and provides relevant comparison between taxable and non-taxable amounts.

(3)

FDIC-acquired loan discount adjustments include the reduction of interest income for FDIC-acquired loan discount accretion excluding contractual interest payments and the increase of core loans for the total balance of FDIC-acquired loan discounts.